China’s crackdown on capital outflows has been a boon for organized crime in the region, with Chinese triad gangs and even Japanese Yakuza organizations partaking in the smuggling bonanza. Over the summer, we reported on a case of Yakuza gangsters teaming up with wealthy Chinese to smuggle thousands of tons of gold out of the country, using Japanese regional airlines as unwitting mules while taking advantage of a loophole that allows them to circumvent customs.
But the Yakuza isn’t the only criminal group that’s capitalized on the desperation of wealthy Chinese to preserve their wealth by moving it offshore: Local triad gangs have helped smuggle tens of billions of Chinese yuan offshore, reaping enormous profits in the process.
To wit, Chinese police say they have broken up a gang that smuggled 20 billion yuan ($3 billion) out of the country. According to the Associated Press, which cited reports from China’s Xinhua News Service, seven suspects were detained in the case centered in the southern city Shaoguan near Hong Kong but as many as 10,000 people might have been involved, the official Xinhua News Agency reported.
In the run-up to this fall’s National Party Congress, the PBOC tightened its rules on cross-border currency transfers, cracking down on foreign real-estate transactions and corporate M&A after Chinese companies went on an international acquisition spree in 2015 and 2016. Many expected the newly anointed emperor Xi Jinping to loosen his grip after successfully consolidating power, but the government has been slow to do so.
The fraud unearthed by the government investigators is astoundingly complex:
The group in Shaoguan is accused of moving money illegally using 148 bank accounts opened in 20 provinces with stolen identity cards, according to Xinhua.
It said they made unspecified "huge profits" by trading on the difference in exchange rates between Hong Kong dollars and the mainland's yuan.
Beijing allowed an informal financial industry to flourish over the past two decades to support entrepreneurs but is tightening controls due to mounting concern about financial stability. Regulators are especially worried about unauthorized cross-border movement of money at a time when they are trying to stem an outflow of capital. The flood of wealthy Chinese pushing to move their money offshore was triggered by the PBOC’s decision to change the way it manages the yuan’s exchange-rate, triggering a de facto devaluation that stoked fears that the currency would weaken further.
According to local Chinese media, wealthy Chinese are enticed into working with criminal groups – referred to as “underground banks” – because fees are low and transactions can be conducted relatively quickly.
"Fees charged are low, remittances are fast and unlimited and the source of funds is not questioned," said the newspaper Guangzhou Daily in a report on the Shaoguan case.
"Compared with banks and other legitimate financial institutions, underground banks are seductive."
Of course, the Shaoguan case is hardly the largest such case in recent memory – not even close. In 2015, police in Jinhua, a city south of Shanghai, reported breaking up an operation that handled unauthorized foreign exchange transactions totaling 410 billion yuan ($64 billion). They said more than 370 people were prosecuted or reprimanded.